Exams

Midterm 2008 (Cairo)

Question 1:
A proposed chemical plant will require a fixed capital investment of $10 million, it is
estimated that the working capital will amount to 25% of the total investment, and the
annual depreciation costs are estimated to be 10% of the fixed capital investment. If
the annual profit will be $3 million, determine each of the following:
 Percent return on total investment
 Minimum payout period (5 marks)

Solution:
Total capital investment = fixed investment + working investment
TCI = 10 * 106 + 0.25 * TCI
TCI = $13.33 * 106
Profit =$ 3 * 106
Depreciation = 0.1 * 10 * 106 = $106

Percent return on total investment = (profit / TCI) * 100 %

= (3 * 106 / 13.33 * 106) * 100 = 22.5%

Minimum payout period = Depreciable fixed capital / (profit + depreciation)

= 10 * 106 / (3 * 106 + 106) = 2.5 years

Question 3:
Consider the following project under study for the production of a product for
detergents in which the following data apply and the average interest rate = 15%
Year 1 2 3 4 5 (6-15)
Net cash flow (EGP1000) (155) (205) (260) 65 100 175

It is required to test project performance evaluation by TRR technique

(10 marks)

Solution:
NPW = 0 = -155/(1 + i) -205/(1 + i)2 -260/(1 + i)3 + 65/(1 + i)4 + 100/(1 + i)5 + 175 *
[((1 + i)10 – 1)/((1 + i)10 * i) ] * 1/(1 + i)5
By trial and error I = 17.4%

Since DCFRR = 17.4% > 15%, there fore the project is viable and accepted.
Midterm 2007 (Berkeley)
You inherited a certain heritage that you will receive in the next 30 years; you will
receive $2000 per year from year 5 to year 10, $5000 per year from year 11 to year
20, $3500 per year from year 21 to year 30, at a rate of 7% annually, what is present
worth of this heritage?

Solution:
It is just a simple problem of annuities
So we will apply the annuities rule on each equal cash flow

NPW = 2000 * [((1 + 0.07)6 – 1) / ((1 + 0.07)6 * 0.07)] * 1 / (1 + 0.07)4

+5000 * [((1 + 0.07)10 – 1) / ((1 + 0.07)10 * 0.07)] * 1/ (1 + 0.07)10
+3500 * [((1 + 0.07)10 – 1) / ((1 + 0.07)10 * 0.07)] * 1 / (1 + 0.07)20

= 7273 + 17852 + 6353 = $31,478

Midterm2005 (MIT)
A couple with a new born daughter wants to establish a college fund to pay for future
college expenses , the couple can earn 7% compounding annually on their
investment and estimate that the future college costs will be $60,000 per year for 4
years, assume that the daughter enters the college at age 18 and payments are
made on each birthday, also assume that college costs must be paid at the
beginning of each college year, what annual payment must be paid to ensure that a
sufficient amount has been saved to cover all costs when daughter enters the
college?

Solution:
F = R [(1 + i)n - 1] / i
We want to calculate the value of R (annual payment) that makes F = all college
costs at year 18

So first we will calculate the NPW of college costs at year 1 of college, note that the
payment to college is paid at beginning of the year no at the end (as we took
problems before)

Year Beginning of 18 Beginning of 19 Beginning of 20 Beginning of 21

payment 60,000 60,000 60,000 60,000

Also e can assume that value at beginning of year = value at end of previous year
(1 day will not make a problem)

Year Beginning of 18 End of 18 End of 19 End of 20

payment 60,000 60,000 60,000 60,000

NPW at beginning of year 18 (first year at college) = 60,000 + 60,000 * [((1 + 0.07)3
– 1) / ((1 + 0.07)3 * 0.07)] = $217,459
Another method to get NPW at beginning of 18, to get each year alone, but notice
that if the years were many, annuities will save the time

NPW at beginning of year 18 = 60,000 + 60,000 /(1.07) + 60,000 / (1.07)2 + 60,000 /

(1.07)3 = $217,459

Now we will calculate the payment that makes the future value of the fund at year 18
= $217,459

217,459= R [(1 + 0.07)18 - 1] / 0.07

R = $6396

Other questions:
If $200 is deposited in a savings account at the beginning of each of 15 years and
the account draws interest at 8% per compounded annually, the value of the account
at the end of 15 years will be nearly:

(a) $6,000 (b) $5,400 (c) $5,900 (d) $6,900

Solution:
Given: A = $200, N = 15 years, i = 8%
Find: F
Approach: Note that each deposit is made at the beginning of each year. However,
the equal-payment series compound amount factor (F/A, i, N) is based on the end-
of-period assumption. To adjust for this timing difference, you may still use the (F/A,
i, N) factor, but adjust the resulting F value for the one additional interest-earning
period by multiplying it by (1 + 0.08).

Thus, the correct answer is (c).